It’s My Construction Contract, I Can Arbitrate Where I Want – Real Estate and Construction

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“[W]hen parties agree to arbitrate all questions arising
under a contract, the [Federal Arbitration Act] supersedes state
laws lodging primary jurisdiction in another forum, whether
judicial or administrative.”1

Subcontractors know all too well that out-of-state prime
contractors and owners often include clauses in construction
contracts that require all disputes be resolved in, and subject to
the laws of, a state different from where the project is located.
These “choice of law” and “forum selection”
clauses are often relegated to the ends of contracts and most
subcontractors lack the bargaining power necessary to negotiate
these terms. This ability to force a smaller subcontractor to fight
a lawsuit in another state provides a “home court
advantage” and oftentimes presents a hardship to the
subcontractor, which ultimately may deprive that party of its
“day in court.”

Not only do these provisions make it costlier and more difficult
to pursue or defend a lawsuit, but they can also complicate the
subcontractor’s work during construction. Issues such as
indemnity, prompt payment, mechanic’s liens, limitations of
liability, cost shifting, and statutes of limitations vary by state
and can materially affect a subcontractor’s rights and
remedies. A subcontractor that does not understand the nuances of a
different state’s laws and the effect of those laws on its
work will be in for a rude awakening should a problem arise during
construction. For instance, a construction contract subject to the
laws of the state of Texas will allow for an aggrieved party to
recover attorneys’ fees if it prevails on a breach of
contract claim regardless of what the contract says about fee
shifting.2 A subcontractor unaware of this statute
might mistakenly believe that each party would have to bear its own
attorneys’ fees in a legal dispute regardless of which party
ultimately prevailed. 

In an effort to equalize the playing field, and protect in-state
contractors from having to fight a lawsuit in a distant
jurisdiction, approximately 28 states have enacted some type of
home-court statute. These “anti-forum” statutes
typically provide that regardless of what contractual choice of law
and venue the parties selected, a contract that is principally for
the construction or repair of an improvement to real property is
subject to the laws of that state and any dispute regarding the
project must be venued in that state. Provisions in the contract to
the contrary are void as against public policy. 

Despite the best efforts of these state legislatures,
contractors do have at least one potential avenue available to make
certain the forum selection provision — and possibly choice
of law — in the contract is enforced regardless of the
project state’s statutory scheme — arbitration.

Several courts have held that the Federal Arbitration Act (FAA)
preempts an otherwise applicable state anti-forum statute. Those
courts hold that the forum selection provision in the contract
forms part of a binding agreement to arbitrate, even if different
from the jurisdiction in which the project is
located.3 Section 2 of the FAA provides that:

A written provision in any…contract evidencing a
transaction involving commerce to settle by arbitration a
controversy thereafter arising out of such contract or transaction,
or the refusal to perform the whole or any part thereof, or an
agreement in writing to submit to arbitration an existing
controversy arising out of such a contract, transaction, or
refusal, shall be valid, irrevocable, and enforceable, save upon
such grounds as exist at law or in equity for the revocation of any
contract.4

According to the Supreme Court, this “primary substantive
provision” of the FAA “is a congressional declaration of
a liberal federal policy favoring arbitration agreements,
notwithstanding any state substantive or procedural policies to the
contrary.” Moses H. Cone Mem’l Hosp. v. Mercury
Construction Corp.
, 460 U.S. 1, 24 (1983). In addition, the
Supreme Court has also held that the parties’ contractual
choice of forum should be enforced except in the most unusual
cases, and that the party resisting the forum-selection clause
(i.e., the plaintiff who filed in a different court) has the burden
of establishing that public interests disfavoring transfer outweigh
the parties’ choice. Atlantic Marine Construction
Co. v. United States District Court for the Western District of
Texas
 571 U.S. 49 (Dec. 3, 2013).

A number of lower court decisions have also found that a
properly drafted agreement to arbitrate preempts a state’s
anti-forum statute under the FAA. See,
e.g., Bell Prod., Inc. v. Hosp. Bldg. & Equip.
Co.
, 2017 WL 282740 (N.D. Cal. Jan. 23,
2017);  R.A. Bright Construction, Inc. v. Weis
Builders, Inc.
, 930 N.E.2d 565 (Ill. App. Ct. 3d Dist.
2010); LaSalle Group, Inc. v. Electromation of Del.
County, Inc.
, 880 N.E.2d 330 (Ind. Ct. App.
2008); M.A. Mortenson/The Meyne Co. v. Edward E. Gillen
Co.
, 2003 WL 23024511 (D. Minn. Dec. 17, 2003); 
and Cleveland Construction, Inc. v. Levco Construction,
Inc.
, 359 S.W.3d 843 (Tex. App. Houston 1st Dist.
2012). In addition, the American Arbitration Association rules
also provide that, when the agreement selects a locale for the
arbitration, “the locale shall be that specified in the
agreement.” R-12, AAA Constr. Indus. Rules.

Arbitration has long been a favored forum for dispute resolution
in construction projects because of its speed, potential for
reduced costs, ability to have an expert in the industry decide the
case, and the private nature of any decision. As the popularity of
anti-forum statutes continues to rise, the enforcement of forum
selection provisions — and possibly choice of law — can
now be added to that list of benefits. Although it remains to be
seen whether every state will enforce venue selection in
arbitration agreements despite the existence of an anti-forum
statute, a well-drafted arbitration agreement clause that triggers
the FAA preemption will go a long way towards ensuring the terms of
the contract remain enforceable.

Footnotes

1 Preston v. Ferrer, 552 U.S. 346, 359
(2008).

2 Tex. Civ. Prac. & Rem. Code §
38.001.

3 Although not addressed by the cases cited in this
article, it is also possible that the FAA might preempt any state
statute dictating that the contract is subject to the laws of a
state different from what the parties selected in the
contract.

4 9 U.S.C. § 2.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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